Requirements for qualifying under an EMI share scheme

Under the Income Tax (Earnings and Pensions) Act 2003, share option schemes are required to meet certain criteria if they are to be recognised as Enterprise Management Incentives (EMI) share schemes.

Conditions for shares

The option must be a right to acquire shares that are part of the ordinary share capital of the company, and:

are fully paid up, and

non-redeemable

Shares are not fully paid up if there is any arrangement to pay cash for them at a future date.

Shares are redeemable if they can be exchanged for cash, at pre-determined dates or events. There may also be conditions that allow shares to be redeemed at the request of the company or the shareholder.

It must be possible for the option to be exercised within ten years of the date of grant, but it does not have to be exercised within that period. For example, if the exercise of the option depends on the fulfilment of performance conditions, it must be possible to do that within ten years.

However, the option agreement does not have to prevent the employee from exercising the option after that time. If the employee does exercise the option more than ten years after the date of grant, there will be no tax relief under Schedule 5. The tax relief on grant will be unchanged.

Conditions for the terms of the agreement

The option must be structured as a written agreement between the person granting the option and the employee. The agreement must be retained by the company so that it can be inspected by HMR&C if necessary.

The agreement must state:

the date the option is granted

that it is granted under the provisions of Schedule 5 of ITEPA 2003

the number, or maximum number, of shares that may be acquired

the price (if any) that the employee will pay to acquire the shares, or the method how price will be determined

when and how the option may be exercised

conditions (including performance conditions) affecting the terms or the extent of the employee’s entitlement

restrictions on the shares.

If the shares are subject to a risk of forfeiture, the agreement must contain details of the conditions. Shares are subject to risk of forfeiture if the interest in shares that may be acquired is only conditional within the meaning of Section 423 Income Tax (Earnings and Pensions) Act 2003.

An option can be granted as part of an employee share scheme as long as the conditions of Schedule 5 are met.

The company can decide to set up a new share scheme for EMI, or use an established scheme. It can grant an EMI option on the back of a scheme that has been set up to grant options under a HMR&C approved Company Share Option Plan (CSOP).

However, it is not essential for options to be granted as part of a scheme, as each option may be an individual agreement.

If options are granted pursuant to a scheme, the relevant parts of the scheme rules must either be:

incorporated into the agreement by repeating the relevant parts of the text, or

attached to the agreement with reference to ‘the attached copy of the rules’ as part of the agreement

The option agreement must contain details of any:

restrictions attached to the shares

conditions such as performance conditions affecting the employee’s entitlement, and

risk of forfeiture

The option agreement can set out these details in the text of the option agreement itself. Alternatively, the details, which may be contained in another document, can be attached to the agreement itself and incorporated into the agreement by reference to the document.

Where the details are included by reference to a separate document, the option agreement will need to specify:

the title of the document

when it was dated or adopted, and

the dates of any amendments

The option can be granted under deed or seal. In these cases, a separate written agreement to the terms of the option will need to be signed by the optioner. This document must contain the conditions set out above.

The terms of the option must prohibit the option holder from transferring any of his or her rights under it.

If the terms of an option allow its exercise after the holder’s death, they must also state that the personal representatives must exercise the option within 12 months of the date of death.

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